12/31/2009 @ 3:20PM

Kraft Food Thrives By Catering to Chinese Consumers

For years Oreo cookies were a hard sell in China. Consumers found the traditional U.S. version of the
Kraft Foods
cookie too sweet and, at the equivalent of 73 cents for 14 cookies, too expensive. The package was too big for small Chinese families.

Like many global companies, Kraft had to dress a signature product differently to gain acceptance in the world’s most populous market. Kraft International President Sanjay Khosla can boast of success. The snack-size (and less sugary) Oreo accounted for 7.3% of the Chinese cookie market for the 12 months through September. That was one-third higher than in 2008. ACNielsen says Kraft’s 22% slice of the $1.6 billion that the Chinese spend on cookies is nearly three times that of runner-up Tingyi of Taiwan. International rival Nestlé has a ninth of Kraft’s share.

Cookies might seem a nutritional nightmare to American parents, but in China, beset by food-safety worries and still short on calories for its poorer folk, they can be a godsend at the convenience counter. Kraft has made another offering: Jai-Gai (translation: “good calcium”), a favorite because it promises the calcium equivalent of three glasses of milk in each 1.5-yuan (25-cent) pack.

“We view China as a market that has taught us how to focus, how to differentiate and how to innovate,” says Khosla, who joined Kraft in 2007 from Fonterra Co-operative Group, a multinational dairy in New Zealand. Before joining Fonterra in 2004, Khosla spent 27 years with
Unilever
overseas. A new cookie r&d center at Suzhou Industrial Park, near Shanghai, will plot future treats.

China is the most important country in Kraft’s developing-markets division, and Khosla has built up a product development and distribution operation managed by Chinese. The division is anchored by the Oreo brand (which has been extended into wafers, soft cakes and a strawberry creme flavor) and by Tang, the usually powdered orange drink that was hot in the U.S. sometime before the first moon landing.

Tang’s tipping point came after Kraft gained a clearer understanding of Chinese consumers’ needs. Says Khosla: “The local business team found that children in China think water is boring, while at the same time mothers were concerned about getting their children to drink enough water. There was clearly an opportunity here.”

He adds that, in a tea-brewing country, “we found that many in China drink Tang hot, rather than cold. So we have developed in-store promotions around this.” The new marketing strategy is yielding high double-digit annual growth.

Kraft’s advance in China was furthered by its $7.2 billion acquisition of Danone’s global cookie operations in July 2007. The deal added Petit Écolier chocolate-coated biscuits and TUC crackers to Kraft’s Oreo and Ritz brands, as well as distribution heft. (In the U.S., the product most identified with Kraft, which was once known as the National Dairy Products Corp., is cheese, which is not so big in the Chinese diet.)

That Danone acquisition helped in China, but Khosla credits the staff there–built as part of a $200 million investment in Asia-Pacific over the last four years–with smartly managing consolidation.

Local knowledge helps in figuring out regional differences. “For example, our Ritz brand is popular in Beijing, but this is in contrast with Guangzhou,” Khosla says. “There are also nuances in consumer preferences regarding flavor, texture and pack sizes. In Shanghai consumers like bulk-size packages, whereas in Beijing there is a distinct preference for smaller-size formats.”

With additional help from Indonesia and other markets in Southeast Asia, the developing-world business at Kraft is what’s powering top-line growth. That part of its food business was up 8% in the third quarter from 2008, while food sales dropped slightly in both Europe and North America. Overall this part of the map now accounts for 20% of company sales.

If Kraft is ever going to succeed with an expensive takeover of confectioner
Cadbury
, it’s going to need reliable revenue growth. Khosla seems to know where to keep finding it.

By The Numbers: From Soup to Nuts

In 1903 James L. Kraft started selling cheese from a horse-drawn wagon. Today Kraft Foods is the world’s second-largest food company.

1912 The National Biscuit Co. introduces the Oreo cookie.

9 minutes The amount of time it took to make dinner for four using Kraft Macaroni & Cheese in 1937, according to ads.

1996 Kraft launches U.S.-style Oreos in China. It retooled its recipe in 2005.